Q4 2022 Natera Inc Earnings Call

Speaker 1: And.

Speaker 2: At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will hold a Q&A session. To ask a question at that time, please press star followed by one on your touch-tone phone.

Speaker 2: Chief Financial Officer, please go ahead.

Speaker 3: Thanks, operator. Good afternoon. Thank you for joining our conference call to discuss the results of our fourth quarter of 2022. On the line, I'm joined by Steve Chapman, our CEO , Solomon Moskowitz, General Manager of Oncology, and John Fesco, Chief Business Officer. These conference calls are being broadcast live via webcast.

Speaker 3: We will be referring to a slide presentation that has been posted to investor.natera.com. A replay of this call will also be available at investor.natera.com.

Speaker 3: Starting on slide two, during the course of this conference call, we will make forward-looking statements regarding future events and our anticipated future performance, such as our operational and financial outlook and projections, our assumptions for that outlook, market size, partnerships, clinical studies, opportunities, and strategies, and expectations for various current and future products, including product capabilities, expected release dates, reimbursement coverage.

Speaker 3: Those documents identify important risks and other factors that may cause our actual results of different material from those contained in or suggested by the board with these statements.

Speaker 3: Four of these statements made during the call are being made as of today, February 28, 2023. If this call is replayed or reviewed after today, the information presented during the call may not contain current or accurate information. The Terrace claims any obligation to update or revise any four listing statements. We will provide guidance on today's call but will not provide any further guidance or updates on our performance during the quarter.

Speaker 4: 2022 both in terms of commercial execution and achieving key milestones. We processed 2.1 million tests, which is year-on-year growth of 32%. Revenues were 20.2 million for the full year, 40 million higher than the midpoint of our initial 2022 guidance.

Speaker 4: Up 31% from 2021, it up 37% when excluding the one-time cur annotation revenue...

Speaker 4: Business momentum continued in Q4 with volume growth of 28% and product revenue growth of 28% year-over-year, even off a bigger base and with a difficult year-over-year growth comparison after a very strong Q4 2021. We performed 196,000 oncology tests in 2020.

Speaker 4: We estimate that now more than 30% of oncologists in the United States are ordering signa terra.

Speaker 4: We've achieved several key milestones even since our presentation at the J.P. Morgan conference earlier this year. First, we were very pleased to see our prospective multi-site circulate study was published in January on the cover of Nature Medicine, which gives you some sense of the excitement that the data is generating in the field.

Speaker 4: Consistent with our earlier publications in both colorectal cancer and other tumor types, the data showed strong, predictive, and prognostic value of signatory 18 months out post-surgery. Solomon will dive deeper into these topics later in the call.

Speaker 4: Second, we received confirmation from MoDx that Signa Terra had met coverage requirements for adjuvant and recurrence monitoring in patients with stage 2B or higher breast cancer across all subtypes. We estimate that stage 2B and higher population could represent roughly 1 million tests per year to Save children according to appointments completed by the National installationIS sexual dissemination Ministry for Healthcare, which Development and Cow flexibility and

Speaker 4: and breast cancer patients already account for a growing portion of our Signetara volume. In addition to the current coverage, we've got a pipeline of data designed to further highlight Signetara's utility and expand coverage in breast cancer. In fact, we expect to publish two large scale breast cancer studies this year.

Speaker 4: each with approximately 1,000 plasma samples. In women's health, we were very encouraged to see the American College of Medical Genetics issue updated guidance to include a recommendation that all pregnant individuals be offered screening for 22q deletion syndrome.

Speaker 4: ACMG's guideline referenced the strong 22-group performance results achieved in the SMART study, and we hope to see action by other medical societies later this year as they digest and incorporate the findings of that study.

Speaker 4: We were also pleased to see another guideline adoption for expanded carrier screening, as the National Society of Genetic Counselors recently offered a very strong endorsement. We will get into this in more detail later in the call. In organ health, the International Society for Heart and Lung Transplantation issued new guidelines.

Speaker 4: recognizing the value of donor-derived cell-free DNA with a Class 1, Level B recommendation. We continue to work towards Medicare coverage for our Prospera heart test. In addition to heart, we eagerly await the publication of our prospective real-world arena care study.

Speaker 4: which evaluated arena sites in chronic kidney disease patients. We expect that study to publish in the first half of this year.

Speaker 4: sites in chronic kidney disease patients. We expect that study to publish in the first half of this year. Moving to 2023 guidance.

Speaker 4: We are setting our initial 2023 revenue guidance at a range of $980 million to $1 billion. We expect to generate this continued top-line momentum even as we reduce operating expenses from 2022 levels and dramatically reduce our cash burn. I'm really pleased to inform everyone that we will be guiding to a cash burn reduction soon.

Speaker 4: of roughly $150 million compared to 2022. We are reiterating our path to hitting a cash flow break-even quarter in 2024.

Speaker 4: As we mentioned previously, we've included about $5 million of annual expense all in for early cancer detection in our budget. This doesn't include the cost of a new PMA-level prospective study, which we estimate would be about $30 million over two years, if required. As we said before, we've included about $5 million in annual expense all in for early

Speaker 4: we're awaiting the results of our proof of concept study and further feedback from the FDA on the R-house trial. Once we have the results and feedback in hand, we can then decide whether it's necessary to pull the trigger on a stepped up level of investment. It goes without saying, we wouldn't do that without having very favorable results.

Speaker 4: from the proof of concept study. Finally, we are very pleased to announce the appointment of Ruth Williams-Brenkley to our Board of Directors.

Speaker 4: Ruth is a seasoned healthcare executive with three decades of industry experience. She currently serves as president of Kaiser Permanente Health Plan of the Mid-Atlantic states, where she oversees regional operations. She also held leadership roles at large health systems earlier in her career. We are thrilled to welcome Ruth to the board and we look forward to working with her.

Speaker 4: Okay, great. Let's get into more details on the next slide. In 2022, we processed approximately 2.1 million tests, a 32% increase over a very strong 2021 growth year. This represents strong traction across the businesses.

Speaker 4: and I think we are well positioned for continued growth. I'm going to start off talking about women's health. Today, we estimate that roughly half of eligible patients in the United States are getting an NIPT.

Speaker 4: While that underlying market continues to grow, we've continued to consolidate market share. As we've also discussed, guideline adoption for 22Q and expanded carrier screening are additional opportunities to further expand access and help more patients, and we are pleased to see recent traction in both areas.

Speaker 4: Let me turn it over to John Fesco, our Chief Business Officer, to discuss some of the latest updates on these topics. John ?

Speaker 4: turn it over to John Fesco, our Chief Business Officer, to discuss some of the latest updates on these topics. John ? Thanks, Steve.

Speaker 4: In December , the American College of Medical Genetics published a practice guideline that recommended offering non-invasive prenatal screening for 22q deletion syndrome to all patients.

Speaker 4: The guidelines specifically reference the SNP-based screening method Natera developed and profiled in our 20,000-patient SMART study, which published last year in the American Journal of Obstetrics and Gynecology.

Speaker 4: 22q deletion syndrome is the most common microdeletion syndrome in humans, affecting about 1 in 1,500 births complimentary, changing the way Your wife

Speaker 4: It is more common than other genetic conditions recommended for routine screening, such as trisomy 18, trisomy 13, cystic fibrosis, and spinal muscular atrophy. 22q deletion syndrome is a leading cause of congenital heart defects.

Speaker 4: palate issues, immunodeficiencies, endocrine dysfunction, and neurological issues. Patients born with 22q deletion syndrome may be very challenging to diagnose. With the median age of diagnosis...

Speaker 4: 4.7 years after seeing on average seven different clinical specialties prior to molecular diagnosis.

Speaker 4: Treatment with calcium from birth can prevent seizures and brain damage caused by hypocalcemia.

Speaker 4: In our SMART study, we saw 83% sensitivity and a 0.05% false positive rate, resulting in a very high positive predictive value of 53%.

Speaker 4: We're excited about the momentum created by the publication of SMART and ACMG's new recommendation that all patients be offered 22-q dilution screening.

Speaker 4: We believe that 22q deletion screening will be a significant differentiator for Natera.

Speaker 4: Because Natera runs targeted sequencing of SNPs, and we can differentiate maternal from fetal DNA, we can cost-effectively sequence at a much deeper level across the 22Q region, versus labs simply doing massively parallel signature sequencing.

Speaker 4: These differences contribute to our high sensitivity, specificity, and PPV. Additionally, today most labs only test for 22q deletions above 2.5 megabases. This is a major limitation because 41% of high-risk 22q results in our SMART study were below 2.5 megabases. Natera is not limited in this way.

Speaker 4: Finally, we've created a significant competitive lead with our published data. To our knowledge, Natera is the only lab who's published a multi-site prospective study of 22 key screenings with genetic confirmation on the majority of subjects. The SMART study took seven years to complete and publish and will likely never be done again.

Speaker 4: To our knowledge, there are no other prospective trials ongoing, in which case this data lead will persist for a long time. We think these significant performance differences will be important to physicians, especially given there is no guideline recommending 22qb offered to all pregnant women.

Speaker 4: We believe physicians will place more value on 22Q performance going forward. These differentiators may also be important for health plans as we start to see coverage come into place, as we believe will happen. It's possible that payers will limit their coverage to only those 22Q tests that have been validated to this extent.

Speaker 4: Beyond NIPT, we're also seeing guidelines change for expanded carrier screening. Early this month, the National Society of Genetic Counselors published a practice guideline to recommend expanded carrier screening be made available to all individuals considering reproduction.

Speaker 4: This follows a recommendation from ACMG in 2021 that expanded carrier screenings should be offered to all pregnant patients. We're also seeing these guideline changes lead to medical policy changes at health plans. In fact, just this month, one large benefit manager that covers 15% of commercial covered lives.

Speaker 4: release the new policy that supports the use of expanded carrier screening. There's still work to be done here, but the fact that we are now seeing progress is important. Okay, I'll turn it back to Steve to discuss organ health.

Speaker 4: Great. Thanks, John . Our initiatives in organ health are going well. We continue to benefit from the publication of the large-scale multisite prospective trifecta study in kidney transplant, which came out last fall. The results of that trial were excellent.

Speaker 4: and appear to have been well received by the community. In heart transplant, we are excited for the readout of the independent, academically led DTRT study. In DTRT, investigators tested greater than 450 plasma samples from greater than 150 heart transplant recipients across seven top academic sites with biopsy mass samples.

Speaker 4: and clinical follow-up of up to three and a half years. We believe this is one of the most significant trials to date in the field and we look forward to the results being published soon.

Speaker 4: Our momentum in heart is timely because IFHLT, the main governing body, just updated its guidelines to include donor-derived self-redean-Acasting for surveillance and heart transplant I also mentioned renecite at the top of the call. As a reminder, renecite is our genetic test for patients that have been previously diagnosed with chronic kidney disease.

Speaker 4: The test can determine whether they may have a genetic cause of their chronic kidney disease.

Speaker 4: We think there are more than 1 million newly diagnosed patients per year and about 37 million patients living with chronic kidney disease. With more than 10% of the population of the United States having CKD and being eligible for testing, we think this is one of the largest areas of healthcare that can be improved with genetic testing.

Speaker 4: Three years ago, we worked with the world's leading investigators from Columbia, Yale, UPM, UPMC, NYU, Mayo Clinic, and Cleveland Clinic, among others, to design the definitive rena-care study. We completed enrollment in rena-care in August , having enrolled more than 1,600 patients from over 30 centers. The study is designed to assess how rena-side genetic finding...

Speaker 4: may impact the clinical management of patient care. As the results read out, it's important to put them in context. I think hereditary cancer is an instructive comparison. In a large study of nearly 3,000 cancer patients published in JAMA Oncology, 13.3% of patients...

Speaker 4: had a pathogenic germline variant indicating hereditary cancer. And of those patients with a high penetrance variant, 28.2% had resulting treatment modifications.

Speaker 4: As RENA-Care reads out, we will be looking at these same metrics. What fraction of the study participants have a pathogenic variant associated with their CKD? And what fraction of the positive patient's treatment was modified after the pathogenic variant was discovered with the RENOcyte panel? We think the RENA-Care study could position us for guideline inclusion in the future.

Speaker 4: This is a very large opportunity and we already have a distribution channel in place through our existing nephrology call point. Stay tuned for more updates on this important opportunity. With that, I will now turn it over to Solomon to review our oncology results in more detail. Solomon? Yes.

Speaker 4: Thanks, Steve. In the past few months, we've made great progress in oncology. The big stories today are volume growth, colorectal data publication, and Medicare coverage in breast cancer. We've observed excellent volume growth and adoption since our launch in 2019.

Speaker 5: At the end of Q3, we communicated our expectation to deliver more than 185,000 units in 2022. And as you can see, we've exceeded expectations with 196,000.

Speaker 5: This growth is driven by new patients, by follow-on tests for existing patients, and by new ordering providers. Steve mentioned that more than 30% of oncologists in the U.S. are now ordering Signa Terra. When combined with strong volume growth, I think this shows that Signa Terra is rapidly becoming part of the standard of care in the United States.

Speaker 5: helping many patients gain reassurance when their test comes back negative or to get an early chance at intervention when the test is positive. In terms of volume mix, the way to think about it is that roughly 60 to 65 percent of the volume is from colorectal, bladder, and immunotherapy monitoring. And now adding breast cancer to that list makes about 80 percent.

Speaker 5: As a reminder, our reimbursement today is largely driven by Medicare, and we are making progress with commercial plans as well.

Speaker 5: We've gotten to this point because of our core technology and the magnitude of the clinical unmet need, but also because we've been able to scale the lab and build an industry-leading medical and commercial team with reimbursement momentum and advanced diagnostic lab test status based on strong evidence of clinical validity and utility across disease types.

Speaker 5: We believe Natera benefits from an important first mover advantage in the MRD field. We think a signatera patient with an existing personalized assay is unlikely to switch to another MRD test.

Speaker 5: We believe Natera benefits from an important first mover advantage in the MRD field. We think a signatory patient with an existing personalized assay is unlikely to switch to another MRD test. That has a ripple effect.

Speaker 5: Since our ordering providers will usually have a cohort of existing signatory patients who are doing ongoing monitoring with regular blood draws, it makes it more challenging to bring another MRD lab into the physician's practice, which creates a unique competitive advantage unseen in the clinical lab industry.

Speaker 5: Another significant competitive advantage is in data generation, where we started working back in 2015. We now have roughly 40 peer-reviewed Signa Terra publications across more than two dozen cancer types.

Speaker 5: I think the fact that we've been able to generate consistently excellent results across tumor types gives us confidence in the eventual pan-cancer adoption and reimbursement for Cigna Terra. Let's turn now to our progress in colorectal cancer.

Speaker 5: In mid-January, we announced the publication of our Sturculate Study in the journal Nature Medicine, featuring 18 months of clinical follow-up across over a thousand patients.

Speaker 5: The study demonstrated strong performance for Signa Terra with a presurgical detection rate of 95.9% in stage 2 and 3 colorectal patients. In addition, we showed the strong predictive benefits of Signa Terra in CRC, where Signa Terra positive patients benefited significantly from adjuvant chemotherapy, whereas Signa Terra negative patients did not.

Speaker 5: We think this has significant implications for CRC patients, many of whom today do not get the chemotherapy they need, or others who may be treated unnecessarily. The key distinction here is the perspective nature of this study, with physicians and patients receiving results in real time, and also the predictive element, which takes the evidence beyond sensitivity and specificity into improved outcomes. This raises the evidence bar for the whole field.

Speaker 5: and it strengthens the utility of signetara in colorectal cancer. We expect that it will help us reach the next level in physician adoption as well as influencing the NCCN Guidelines Committee. We are still anticipating an updated NCCN guideline in the near future since it has not yet been published from the annual committee meeting in August of 2022. Given the timing of our publication this January , we do not know if the evidence will have been incorporated by the NCCN Committee in this round.

Speaker 5: In that case, we expect it would be considered in the next round. Also, the CIRCULATE trial is ongoing, with future readouts expected to strengthen the evidence further, including from the two randomized arms, Altair and Vega. To step back for a minute, our journey in colorectal cancer creates a replicable roadmap for signatory adoption in new indications. First, the Biobank cohort that confirmed clinical validity.

Speaker 5: and enabled Medicare coverage and initial adoption. Then the prospective trials, partnered either with pharma or academic consortia, that drive more definitive evidence with an aim to change guidelines.

Speaker 5: We plan to repeat that journey in bladder cancer, immunotherapy monitoring, and breast cancer. The Moldy X decision to cover signetera in breast cancer is the latest example of this model at work. Signetera was approved for coverage in advanced breast cancer patients for both adjuvant and recurrence monitoring.

Speaker 5: across all disease types. Given the number of people suffering from breast cancer in the US, we view Medicare coverage as a critical milestone.

Speaker 5: Looking at the addressable market, there are approximately 290,000 newly diagnosed breast cancer patients every year, with approximately 25 to 30 percent of these patients with respectable stage 2B and higher.

Speaker 5: For this patient population, we estimate an addressable market of approximately 1 million tests, and we see potential opportunities to expand our coverage in the future into the neoadjuvant setting and earlier stages of disease.

Speaker 5: Steve mentioned that a meaningful chunk of our existing signatory clinical volumes, approximately 15%, are already coming from breast cancer patients. This is an early sign of the strong demand from patients and physicians to inform difficult treatment decisions and better monitor their disease. Many of our strongest testimonials come from patients with breast cancer.

Speaker 5: including one that was featured on Good Morning America. The breast cancer community is highly organized and self-empowered, making this an indication where we see patients voting with their feet. We're looking forward to growing rapidly in breast cancer as we expand our commercial effort and deliver more data from our clinical pipeline.

Speaker 5: This coverage decision expands our reimbursed addressable market to approximately 3.5 million tests per year. In 2023, we will be focusing our team on growth in CRC and breast cancer, as well as bladder cancer and immunotherapy monitoring. Publishing new evidence.

Speaker 5: and translating it into expanded coverage and adoption. Our clinical data pipeline remains strong, with this slide showing some key highlights. During Q4, we continued our progress with peer-reviewed publications in gastroesophageal and anal cancers.

Speaker 5: along with the key publication of our circulated study. We also had a good data set in melanoma that was accepted for publication. And at key medical conferences, we presented new data in colon, esophago-gastric, anal and neoadjuvant breast cancer.

Speaker 5: At the same time, we remain focused on our Phase III studies and our CDX partnerships in colorectal, bladder, and breast cancers, shown on the right side of the page here, with more to come.

Speaker 5: At the same time, we remain focused on our phase three studies and our CDX partnerships in colorectal, bladder, and breast cancers, shown on the right side of the page here, with more to come. Now I'd like to hand it over to Mike to cover the finances.

Speaker 3: Mike? Great. Thanks, Solomon. The next slide just summarizes our 2022 performance and financials. Steve covered the revenue and growth rates, and we feel like we are in a great position to continue driving growth, given our leadership position in several large and underpenetrated areas of care. I would just note that the growth comparison versus 2021 is a little skewed against us, because you'll recall in 2021 we had the one-time revenue recognition of close to $29 million from the wind-down of our chyogen partnership that Steve alluded to. That also affects the comparison on gross margins, which were a little elevated in 2021 through 2011 and this union, as well as in sensors related to the collaboration, which was a critical area for carbon Everything that's happening isInternet CHA.

Speaker 3: all of our focus areas, but include some caution on advancing average selling prices.

Speaker 3: As we've described in the past, we feel as we can make meaningful progress on ASPs just through execution in women's health and the natural evolution of our volume mix for significant clinical volumes, and we've included modest progress on these fronts in the guide. We are also including a very modest benefit from the recent breast cancer coverage decision, and I expect we will be able to give more details on the impact of breast cancer coverage once we gain more experience with the reimbursement.

Speaker 3: In addition to those efforts, we have the three major guidelines that can really change our reimbursement profile with 22Q and expanded carrier screening in women's health and NCCN guidelines in colorectal cancer. Consistent with our typical approach, we haven't included any potential impact in these guideline changes in our forecast just because we don't control the outcome or the timing. We are taking a similarly cautious line of gross margins.

Speaker 3: This guy essentially presumes limited progress on reimbursement and hitting our COGS projects this year. Over the longer term, guideline inclusion and contingent steady reimbursement execution would give us clear line of sight to gross margin in the mid-50s and beyond, just as we have described in the past.

Speaker 3: Okay, on the next slide, I want to spend a bit more time on OpEx and the cash-spurring guide. You'll note that despite guiding to continued growth, we expect to see operating expenses to decline by roughly $45 million this year versus 2022. As Steve described, we built strong leadership positions in each of our areas of focus that can now drive sustainable future growth.

Speaker 3: without continuing to increase operating expenses. Many of you will recall that we've executed this playbook once before when we pledged to get to cashflow breakeven in our women's health business by the middle of 2021. In that instance, we had spent years building a commercial channel, running large clinical trials, improving product performance while executing large cost reduction projects.

Speaker 3: and investing in a user experience platform that could scale with large volume increases. We did held our wind and kelp-related expenses stable as the big trials concluded. While the volumes continued to pour in, we met our 2021 guidelines. We've now established strong leaders of positions in our newer areas of focus.

Speaker 3: and this year we can start to demonstrate the same operating leverage. As a result, we expect our cash burn to decline by roughly $150 million this year alone.

Speaker 3: We've already demonstrated meaningful reductions in quarterly cash burn over the course of 2022, where we burned approximately $160 million in Q1 of 2022, and now we're at roughly half that amount in Q4.

Speaker 3: We've also been making good progress in collecting on some of the accounts receivable generated during the rapid growth we experienced last year. I called out roughly $50 million in cash collection backlogs in Q3, and we estimate we've collected about $40 million of that cash to date. DSOs also declined modestly in Q4, despite continued strong sequential revenue and volume growth.

Speaker 3: and we put a lot of muscle behind accelerating our signature reimbursement processes recently. We think all this progress puts us in good position to pursue the cash flow breakeven target we set last year. If we get good news on any of the three guidelines I mentioned, we fully expect to reach a cash flow breakeven quarter in mid-2024 as we previously described.

Speaker 3: If we are delayed with those guidelines, we still think we're in a great position to hit the goal with continued cost discipline, so we expect our existing cash balance will allow us to meet the current objectives ahead of us.

Speaker 2: So we are very pleased to share these results with you today. And now let me hand the call over to the operator for questions. Operator. As a reminder, to ask a question, simply press star 1 on your telephone keypad. Our first question will come from the line of Tejesavant with Morgan Stanley . Please go ahead. Cshot a question about JPEG conception, sounds better, test of

Speaker 6: Hey guys, good evening. So just a couple of quick follow-ups here, Mike, for you. Can you talk in a little bit more detail about the Signetara breast coverage decision in terms of both the near-term impact? I know there is some chance of a look-back payment and obviously you've cited about 15% of your current volume that comes from breast. So just curious as to some specifics around...

Speaker 6: in the sequential trajectory on gross margins today or would be helpful as well. Thank you.

Speaker 3: Okay, thanks, Stagest. I appreciate the questions. I'll think about last one first. And yeah, I do. I think you're what you've inferred in your question is right. I do expect gross margin trajectory to just improve over the course of the year for all the variables that we've discussed on the column in the past. I mean, you have more time for reimbursement and signature to take in. You have more time for the mix to evolve into it for us to continue to improve our ASP's signature up. And then some of the other.

Speaker 3: some other projects that we're working in the Women's Health Channel also have more time to their fruit as you progress with the year. So I do think that's kind of a steady margin progression through the course of the year. On the breast cancer contribution, yeah, look, I mean, we obviously just got the positive decision from Moldex and we're very excited about that. And just given the short timing between getting that news and...

Speaker 3: And this call, we just, as usual, we just kind of err it on the side of caution in terms of the contribution to the guide. A couple of things that we're looking for is that we're going to need to engage with the Iridium and just kind of get the details from our map on the pricing. And that'll happen on the typical timeline. And that will give us more clarity on exactly how, what the contribution can be through the quarters of the year. I would also expect that to be kind of back in weighted. The other variable I think to call out there is just the, you know, what can the volumes

Speaker 3: in breast cancer. I think Steve alluded to this on the call. A lot of the breast cancer volume has come in like quite organically through our channel. And now on the heels of this tolerance decision, there's a potential for us to significantly expand our reimbursed breast cancer volume. So you got to give us a chance to go and execute on that before we incorporate it in a guide. And finally, on the look back payments, I mean, I expect there to be some, typically these things are.

Speaker 3: the coverage decisions end up being effective as of the submission to MULBX. So I think there will be some look back there going back into last year. And as we have more clarity on that, we will let you know. Let me pause there, Steve, if you had any other commentary on that question. No, I think you thoroughly covered things. Thanks, Mike.

Speaker 3: the coverage decisions end up being effective as of the submission to MULBX. So, I think there'll be some look back there going back into last year. And as we have more clarity on that, we'll let you know. Let me pause there, Steve, if you had any other commentary on that question. No, I think you thoroughly covered things. Thanks, Mike. Got it. Thanks, guys.

Speaker 2: Your next question comes from the line of Julia Kim with JP Morgan. Please go ahead. Hi, good afternoon, guys. So just to follow up on the gross margin guidance, I mean, looking at the 41 to 44 percent versus your mid-50 percent gross margin, somewhere in 24, do you see any obviously understanding that, you know, guideline is a big moving piece to that, but, you know, how much of that gross margin improvement is dependent on the guideline and the revenue selection and how much of that is kind of, you know, more within your control, like the lowering sequencing cost in lab operations? And then if the guidelines do not materialize before mid-2024, what kind of levers or where do you see flexibilities to further take down cost? And then I have a follow-up. Mike, let me first kind of just comment on, you know, some of these COGS products.

Speaker 3: clearly within our control. I mean, Steve touched on the COGS projects. I think on the ASP front, I mean, we also talked in detail about the evolution that we expect to see in Signetira ASPs. Just as a reminder, we've already kind of seen a real sea change in Signetira ASPs from launch to now.

Speaker 3: which is, you know, ASP were in the mid 400s as we started and now they're kind of in the mid 700s. And that can continue to evolve in our favor just based on news and increasing the reimbursement we're seeing, you know, from Medicare and also expanding some commercial coverage as well. So I think those are all levers that are in our favor. And then I think the other part of this in terms of levers that we can pull, I mean, you see us pulling some of these levers.

Speaker 3: right now, and that is just kind of the leverage we can get on our operating expense base. So I think this, our ability to continue to drive revenues on the current platform, I think is simplified by the cash burn guide. And I think in the event that.

Speaker 3: I don't think that means that they're permanently delayed. I think that means you can still get them. And we've got scope for us, I think, to still meet our goals with continuing topics, discipline, as we talked about in the Compare No Marks. Yeah, and just to be clear, we don't need any of those guidelines to come in to get to that 50% margin target. Gotcha. Super helpful. And then one more on the women's health side, if I may. It seems like between microdeletion, ECS, and MRD, microdeletion is the nearest term in terms of when we can expect guidelines.

Speaker 4: You mentioned in your prepared remarks that, you know, the evidence is strongest for 22Q, so if the guideline and subsequent payer coverage is limited to 22Q, how much ASP left can we expect to see for your woman's health volume? Yeah, I'll take that. So, you know, 22Q, I think, is really the whole ballgame for micro-elision testing. So when we actually led the coding submission to the AMA, which started, I think, in 2013, 2017,gamerorist claims, you could actually see the entire computer.

Speaker 4: 2017, the Code was granted in 2019. And today, the pricing that we have in payer contracts and the CFS is for 22Q. Other deletions are included, but 22Q is sort of the base micro deletion that's part of that coding infrastructure. So the pricing from payers will be the same, whether it's 22Q or whether it's broad micro deletion. We think 22Q is where most of the interest is, as we go forward, and I think that's where the guidelines are going to be focused. We've got a lot of differentiators. I mean, I may John sort of highlighted some of those, but these differentiators really make a big difference both with positions, and we think also with payers.

Speaker 4: And I think it's going to be interesting to see how this pans out in the future. I'll also mention on expanded carrier screening. So today we have a good guideline in place for NSGC. There's a strong guideline from ACMG and the ACOG guideline is actually pretty strong. We think it's in fact supportive of expanded carrier screening. And that's one of the reasons why you're seeing payers starting to issue positive coverage policies. So we mentioned on the call that one of the lab benefit managers that covers 15% of all the commercial covered lives in the United States just last week issued a positive guideline.

Speaker 4: for expanded carrier screening. And so that's new incremental upside that's not in the model. And I think as Mike mentioned, product mix is sort of one of the reasons why you've seen this slight reduction in margin recently. Some of that comes from us making a proactive decision to take on some of the low margin semaphore business as they went out of business. And we thought that that was a good idea to do because we knew that these guidelines were coming. And it turns out that was the right decision. Now we've seen since they went out of business and we picked up a significant chunk of that volume, we've seen this big lab benefit management company now come out and say they're gonna be covering expanded carrier screening. We've seen the NSGC guidelines come out. So I think that was the right decision is sort of temporarily take on a larger book of expanded carrier screening volume, where we might have a slight Kirin

Speaker 5: Steve, did you want to comment? No, I was just going to say, if you want to make any more color on that, go ahead. Yeah, look, the major accelerating growth we're seeing right now is from the clinical business for the multiple reasons I reviewed during my remarks.

Speaker 5: The farmer business is looking steady and we've got a pretty strong pipeline as well, both of retrospective studies as well as new prospective trials. We remain committed to our Phase 3 and Companion Diagnostic Partnerships as well.

Speaker 3: Okay, got it helpful. And then maybe for Solomon as well and trying to understand the overall TAM that is accessible and inaccessible at this point for Signetara given that you already are in breast and congrats on that. CRC already I.O. monitoring, the indications are expanding.

Speaker 3: So maybe talk to us as to the tumor-informed approach with the tissue. How much of that 20 billion or so market can you capture? And what portion of the market remains inaccessible because it's a tissue-based approach.

Speaker 5: Sure. Thanks for the question. I don't think of major portions of the market being inaccessible because of a tissue-informed approach. I think anything that tissue-informed approach gives an advantage in terms of a single product that can be applied pan-cancer and across stages of disease. And I think that's how we're seeing this story play out.

Speaker 5: So, to your question of penetration of the TAM, breast cancer was a really significant milestone for us, given how many patients are out there suffering from breast cancer or who are breast cancer survivors. Three and a half million tests per year now addressable and covered by Medicare is very significant. So, in terms of growth, there are multiple additional indications that we see for opportunity to expand coverage with Medicare. But I think that at this point, in addition to that, we're really focused on expanding the private coverage for the indications that you already saw on the slide in colorectal cancer, bladder, breast cancer, and immunotherapy monitoring.

Speaker 5: So, I think there's a ton of growth on the table from those four categories and from growing to new ones where we've shown several studies that have good validity evidence in other GI cancers in the neoadjuvant setting for breast cancer and more. Hopefully that answered your question. Yeah, that's a very helpful element. The last one for Mike, if I may, Mike, the carrier testing market saw an exit from one of your competitors. So, wondering sort of how are you thinking about that volume? You know, some of that volume coming to Natera and then, you know, could you talk to us about commercial pricing in that market and how should we think about the ASPs in that market in 23 and beyond?

Speaker 4: Thank you. Let me take that one, Mike. I mentioned previously, I think we did see the absolute, a pretty sizable competitor. And, you know, Niterra has actually done pretty well and gained some of that business there, largely in carrier screening. Now, that's relatively low margin business today. And, you know, as we've outlined, we think that there's an opportunity in the near future to significantly increase the SP, you know, that volume that's coming in. And we just saw a guideline on expanded carrier screening from.

Speaker 4: you know, NSGC, we just saw a large benefit management company that covers 15% of commercial covered lives change their coverage as of last week, whereas previously you wouldn't have gotten coverage, now you will. So we think that there's a lot of upside and that sort of bet that we made on going out and saying, look, let's take on this business even though it's low margin initially, but we can turn it into something that makes sense for us, I think was the right bet. Mike, do you want to comment further on sort of what the landscape looks like? No, I think that covers it well. Thanks. Yep. Thanks. All right, guys. Thanks. Your next question will come from the line of Max Masucci with Caltech.

Speaker 4: to be static, you know, say, five years across all subtypes, or could it vary by subtype? Yeah, so, we're really waiting. Yeah, let me just add a couple comments so you can jump in. I think we're, you know, if you look back at the clinical trials that we've done, I think we've done about...

Speaker 5: clinical trial. Right, yes, so just to echo Steve's comments, the conservative views to look at what we presented in the paper, the EBLIS trial that was published in clinical cancer research, which had followed up of up to five years.

Speaker 5: and testing every six months. But to your question, Max, the patients are treated very differently depending on their disease subtype and their stage. So we know that if a patient, for example, with triple negative breast cancer is gonna recur, they tend to recur earlier, post-surgery and post-definitive treatment to a HR-positive, HER2-negative.

Speaker 5: patient whose chance of recurrence is kind of steady over even more than five years, up to ten years. We do expect to see some variation in the usage patterns across those subtypes. I think it's still a little bit early days to see how that really plays out. I think also we're pretty pleased to see the initial uptake of Signetara in breast cancer as we mentioned where a really significant number of patients are just voting with their feet and they want that information during the surveillance period as well as to help inform.

Speaker 5: Do you expect that the signatory abreast Medicare coverage win to trigger or accelerate ordering of signatory IO in 23 beyond? Yeah, let me just comment there. You guys try to take it. I think.

Speaker 4: getting a Medicare coverage, I think, definitely is an endorsement of the data. I mean, they do a very rigorous review. And I think it may not necessarily be that sort of coverage that sort of triggers additional ordering, but I think it allows us to feel comfortable to have our medical affairs team out educating physicians and our commercial team out educating physicians very thoroughly about the indications. So when you look at muscle-invasive bladder, I mean, we're seeing record numbers. When you look at IO, we're seeing record numbers grow.

Speaker 4: And when you look at any indication that's come out and got coverage, that really has triggered, I think, additional education and medical education around the particular tumor type, which does result in increased utilization. So, certainly breast-protein, a really strong organic interest, but once we put the power of our team behind that as well to show the data and educate physicians on the studies that we've done, we think that can be powerful. Great, thanks.

Speaker 5: I was just going to add to that that we do see, I think your question is about one of the nuances with does coverage in bladder or coverage in breast cancer trigger increased usage in IO monitoring? That's an interesting question. We do see that to the extent that if physicians may start using the test in one particular type of patient and then start to realize the benefits that could be applied across many more patients in their practice. We've seen that over and over again. That is a natural type of step. The other thing I'll mention is that it's sort of related to Puneet's question earlier. The number of patients who are eligible for immunotherapy continues to grow every time new trials read out from the top checkpoint inhibitor manufacturers.

Speaker 2: And that just continues to expand our eligible population, as well, with more and more patients on immunotherapy. That's great. I appreciate the detailed response. Your next question will come from the line of Catherine Schulte with Baird. Please go ahead. Hey, guys. Thanks for the questions. I guess first on the commercial payer side for Cigna Terra, what are your expectations for 2023 if we just assume no NCCN guideline inclusion? Are there any other states that have or are working on legislation for covering genetic testing, like Cigna Terra, similar to what we saw in Louisiana last year? Solomon, do you want to take that?

Speaker 5: Sure. There are four states who have already passed legislation and a whole lot more who are viewing legislation in their state houses. And so we're actively monitoring that, so we don't really control that. But we are involved in a lot of the discussions. I think John Fesco and his team have done a great job of educating lawmakers across the 50 states. So we do see more and more progress now with commercial payers as our evidence continues to strengthen and as the adoption among their covered patients also continues to increase. So we expect, we do expect to be making some announcements. I think this year of commercial coverage and.

Speaker 7: Hopefully, we've seen further adoption of the fire market legislation. I hope John , if you want to add anything to that. Thanks, Solomon. Just to expand beyond Louisiana, legislation has passed in effect now in three other states, including Rhode Island and Illinois, Arizona. There's legislation pending in at least 15 states this year, championed by the American Cancer Society, including some big sticks like Texas, Florida, New York. So we actually feel quite confident about that and it's great for patients, it's great for the space. That's pushing commercial policy on.

Speaker 4: the payer site as well. Okay, super helpful. And then maybe one on early detection, you know, when should we expect to hear the results from the proof of concept study and FDA feedback just to know the path forward for that program? Those 2023 events? Yeah, they definitely will be so, you know, I would say what the proof of concept will probably be like, you know, two phases. One will be, you know, slightly smaller study and then they'll be a follow on study that, you know, has several hundred patients.

Speaker 4: which we hope to be able to announce the results from. I think those will definitely be 23 events and then as far as FDA goes, we do expect to get some additional feedback this year. You know, we've already previously described some of the initial feedback, but I think the key right now is that the investment is low. We're keeping that stable at around 5 million a year and we're in a position to crank that up on the back of very strong proof of concept results, which we hope to have.

Speaker 3: All right, great. Thank you. Our next question will come from the line of Andrew Cooper with Raymond James. Please go ahead. Hey guys, thanks for the questions. Maybe to start, you know, you've given in the past some metrics on sort of the California dynamics. Can you give us the latest and greatest there and sort of what the expectations assumed in the guide are for the status quo or potential outcome from some of the legal actions going on there?

Speaker 3: All right, great. Thank you. Our next question will come from the line of Andrew Cooper with Raymond James. Please go ahead. Hey guys, thanks for the questions. Maybe start, you know, you've given in the past some metrics on sort of the California dynamics. Can you give us the latest and greatest there and sort of what the expectations assumed in the guide are for the status quo or potential outcome from some of the legal actions going on there? Mike, you want to take that?

Speaker 3: Yeah, sure. I mean, we've – yeah, just to recap, I mean, there's now an injunction in place in California which allows us to offer panorama to our customers there, which is great. We've basically in the guide we've assumed that this is still a fairly meaningful headwind in 23 as it relates to margins, but I do think that there's a side there. As we kind of progress through the year, we'll continue to give you updates to get an increasing fraction of our customers will migrate to panorama over time. So I think that's another one where it's – look, that's a hard one to model for all the obvious reasons. And when faced with those types of things, we tend to be conservative and cautious. So we've basically modeled a very kind of modest scenario there to which we hope we can beat. Okay, great. And then I want to focus maybe on one comment you made around –

Speaker 3: the path to break even. I think you said, you know, we've done this before in women's health. So I guess does that, does that lead us to believe when we think about some of these OpEx cuts that are coming, they're coming outside of women's health. Is there more meat on the bone there? Just how do we think about the actual dollar reductions and where some of those are actually stemming from and what they tell us about sort of the business and where you're going from that perspective? Yeah. Sorry. I'll make a couple comments and then you can.

Speaker 4: Feel free to jump in. I mean, look, we've been really focusing on sort of running an efficient operation for a long time. I think when you look at a lot of the spending that we've been doing on R&D, a lot of that's in clinical trials. I think as some of these studies start to read out and trials start to phase off, you can start to get some of the reduction in operating expenses. I'll give you one example. This is a smart study. So for seven years in a row, we spent between $5 and $10 million a year running that study. And now it's done. The results have read out and we no longer have to.

Speaker 4: continue making that investment anymore because the study is done. So I think that's a great example of where we've made the right investments. We funded the trial and now the trial is completed and it's wrapped up. So there's a lot of focus on sort of efficiency on completing some of the trials. You see we now got 40 publications. That took a lot of work. But it's really sort of across the board.

Speaker 3: Okay, great. Maybe one last one. Mike, you said, I think, mid 700s ASP in the clinical side for Cigna Terra. I think last quarter you said over 750. I just want to make sure kind of the trajectory there and how you think about in the guide to the degree you can give a little bit more detail, just the growth in covered indications, which it seems like you're certainly focusing on, versus ancillary growth that you're happy to take, but in non-covered and sort of the margin diluted side. Yeah, we saw another good quarter of this.

Speaker 3: this quarter in terms of just kind of steady clinical oncology ASP progression. So I think we're on the same, we're kind of humming along there as a way I'd characterize it. And I think we talked about previously that, you know, leave the guidelines aside just on things like volume mix, expansions in the covered universe, fewer people kind of in the bundle and more kind of getting to the reference monitoring setting.

Speaker 3: I think there's a pretty clear trajectory for us to get into the 800s over the course of the year, and I, you know, I feel like we're right on track with that. Great. I'll stop there. Thanks again. Our final question will come from the line of Mark Massaro with BTIG. Please go ahead. Hey guys, congrats on an excellent 2022. So, you know, you have a number of peer reviewed publications and.

Speaker 4: I guess I'd be curious if it's reasonable to expect you to add a couple more Medicare coverage wins this year. Obviously, you have data for lung, esophageal, melanoma, head and neck, pancreatic, ovarian, but how should we think about the timing of potential Medicare coverage determinations and roughly how many have been submitted?

Speaker 4: to MALDEFs that we would be waiting on, you know, some type of decision. Yeah, thanks, Mark. So, you know, we have a steady flow of submissions that, you know, go on at any particular time. I mean, we're not, sort of, for competitive reasons, you know, we're not outlining the exact strategy, but, I mean, the fact that we have 40 peer-reviewed publications is a big deal, because you cannot get coverage

Speaker 4: without having peer-reviewed data. So we think the ability, you know, to leverage these publications to go get coverage is actually a big differentiator and a big moat for Natera. You know, it's the same with our ADLT status, right? So from our view, no one else is eligible for an ADLT without going and getting FDA approval, which is a very difficult path for others to go out and do based on their starting point. So again, we think that's another big reimbursement.

Speaker 3: and garden health, for example. You know, we saw some pan-solid tumor determinations, which kind of covers a bunch of indications with one decision. You guys have done a great job of showing a lot of data, but do you think in the future, we may be able to see, you know, a pan-solid tumor Medicare coverage determination, and curious if you're, you know, having that conversation with Medicare and what type of framework they might be communicating to you.

Speaker 4: Yes, so I think we have always sort of said that we think that you really have to go indication by indication until you have hit a certain threshold or sort of a tipping point where it becomes more of a pain cancer view. And I think we are really moving fast at getting through the indication by indication coverage. So I think we are doing a great job. We are delivering the evidence and that is going to be the foundation.

Speaker 4: The great thing about Signa Terra and the tumor-informed approach is that it's pan-cancer. We don't have to go out and kind of redesign the assay. We just run the same platform across all different tumor types. And I think that enables this path to pan-cancer. So stay tuned. I think it's possible there could be some momentum on pan-cancer in the future, but we're going to have to see how things pan out.

Speaker 1: Sounds good. Thanks so much. Ladies and gentlemen, that will conclude today's meeting. We thank you all for joining. You may now disconnect. The Anthony